Give Yourself a Big Bonus

What skyrocketing CEO pay says about corporate leadership
From the June-July 2006 Trumpet Print Edition

The guys making the big bucks are making bigger bucks than ever. I’m talking about ceos, who took home record pay last year. Capital One Financial’s Richard Fairbank made almost $250 million—more than the profits of 550 Fortune 1000 companies, including Goodyear Tire & Rubber, Reebok and Pier 1. The $149 million that Analog Devices ceo Jerald Fishman took home seems to pale in comparison.

There’s nothing necessarily wrong with making money. After all, even the Bible says you should reward a man according to his works, and that a worker is worthy of his hire. Many of these ceos have led their respective companies and shareholders to massive profits. But the Bible also warns about greed, dishonesty, and lack of character in leadership. In too many cases, soaring ceo paychecks are a symptom of poor leadership at best—greed and a lack of integrity at worst.

The median pay among ceos of the 100 largest U.S. companies leaped by 25 percent last year. Not too many employees get rewarded with 25 percent raises. The typical American worker received a 3.1 percent average wage increase over the same period. Are ceos more important today than they were 10 or 20 years ago? How about two or three years ago? Are average ceos worth the over 50 percent more they get paid today than they did in 2004?

During the 1970s and ’80s, ceo compensation was roughly 15 to 20 times that of the average employee (FrugalMarketing.com). By 2002, that executive compensation had skyrocketed to 281 times more than the average worker (Kiplinger Business Forecasts, March 14). Today, some estimates put it at closer to 431 times average pay. In comparison, ceos in the United Kingdom earn 25 times as much as their employees, while those in France, Germany and Japan earn even less (ibid.).

“The system’s broken,” says Mark Van Clieaf, an analyst at mvc Associates International, a firm specializing in pay-for-performance issues, in reference to pay and performance being out of alignment (USA Today,Dec. 15, 2005).

What makes these statistics even more disturbing is that when executives fail, often they still get paid a ton. Even those who are fired are taking away millions at a time including bonuses.

For example, over the past five years, executives at Honeywell destroyed $4.3 billion in economic value (net operating profit minus the total cost of capital used up) while the top five executives made a combined $223 million over the same period. Time Warner executives destroyed $41.4 billion in economic value and $59.8 billion in market value while they collected $1.3 billion in pay.

A letter originally sent to the Securities and Exchange Commission and obtained by USA Today cited research showing that, in fact, ceo pay at many companies actually bore no relation to how well those companies performed. Over the last five years, 60 of the worst-performing companies in the Russell 3000 index (which covers 99 percent of the U.S. stock market) lost a combined total $769 billion in market value. At those same companies, 300 top executives were rewarded with salary, bonuses and stock options worth $12 billion (ibid.). In return for destroying some three quarters of a trillion dollars in shareholder value, these executives were rewarded with $40 million apiece. You would think that if you destroyed that much shareholder wealth, you would consider giving some back to the shareholders in the form of drawing a lower salary. Unfortunately, this kind of mindset is rare in society today.

The problem is not so much that ceos are paid an awful lot of money. It is that they often are not standing up for their investors and their employees—the people whose interests they are supposed to be looking out for.

ceos are supposed to look out for those they are responsible for. However, in their search for ever-increasing paychecks, many have lost sight of their responsibilities—the welfare of their companies and those underneath them. A ceo who accepts massive payments while the company he is responsible for is floundering certainly isn’t showing the integrity essential in quality leadership. Putting selfish interests ahead of those one leads—in this case, to the tune of millions, even billions, of dollars—is the antithesis of sound leadership.

Leo Hindery has been ceo or president of five major media and cable corporations. He says, “Excessive executive and ceo compensation belies the principles of a meritocracy …. Senior management positions are a privilege, but they rise to something akin to royalty when their associated compensation is at totally unjustified levels …” (FrugalMarketing.com).

If ceos were exhibiting proper leadership, the formerly prestigious but now scandal-ridden Enrons, WorldComs, Adelphias and Tycos would not be the corporate embarrassments they are today. It would be stretching it to say these companies became disasters because of excessive executive compensation—but the greed and lack of integrity exhibited by those at the top are indicators of problematic leadership. With honest leadership, reputations would still be intact, shareholders and retirees would be happy, and thousands of employees would still have jobs.

Unfortunately, excessive ceo pay has become symptomatic of the decaying leadership within corporate America.